July 23, 2009 – If a buyer backs out of a real estate sale, the seller can keep the earnest money as liquidated damages or sue for actual damages – but the disappointed seller cannot do both.

In Osborn v. Dennison, 2009 WI 72, a unanimous Wisconsin Supreme Court interpreted on July 9 the seller’s remedies for breach provided in the state’s mandatory WB-11 Residential Offer to Purchase form. If the seller fails to direct the broker to return the earnest money to the buyer before or at the same time as the suit for actual damages, the seller’s recovery is limited to liquidated damages, the court concluded.

Unfinished house sale

Harold Dennison offered to purchase the home of Douglas and Martha Osborn using the WB-11 form. During a pre-closing inspection in May 2005, Dennison discovered damp insulation and damp walls in the basement. He sought an extension of the closing date to address those issues, but the Osborns refused and the deal did not close.

The Osborns directed their broker to hold Dennison’s $2,000 in earnest money, and they expressed an intention to sue Dennison for actual damages once tallied. Dennison requested the return of the earnest money in May 2005, but the Osborns continued to have those funds in escrow, even as they sold the house to a third party in October.

About six months later, the Osborns sued Dennison for breach of contract, demanding actual damages. Dennison moved the court to dismiss for failure to state a claim, arguing that blocking return of the earnest money meant the Osborns had opted to take them as liquidated damages.

Dennison also charged in his answer to the complaint that return of the earnest money is a condition precedent for bringing an action for damages. The Osborns subsequently directed their broker to release the earnest money.

The circuit court denied Dennison’s motion to dismiss. After the parties followed up with motions for summary judgment, the circuit court partially granted Dennison’s motion and ruled the Osborns were limited to collecting the $2,000 in earnest money as liquidated damages. The circuit court held the Osborns had irrevocably elected the remedy of liquidated damages when they refused to release the earnest money in May 2005. The court of appeals affirmed.

Only one remedy

In a majority opinion authored by Justice David Prosser, the supreme court upheld the lower court decisions.

The court explained that the breaching party’s surrender of earnest money under the WB-11 form gives the other party recovery that might not be as great as that available through litigation, but is comparatively speedy and inexpensive. In this case, “the sellers tried to obtain the best of both options without faithfully following either one,” the court remarked.

Justices distinguished this case from Galatowitsch v. Wanat, 2000 WI App. 236, in which sellers changed the object of their lawsuit from liquidated damages to actual damages in midcourse.

In Galatowitsch, the buyer walked away from a deal, but refused to relinquish the $2,000 earnest money to the sellers. The sellers sued for the earnest money, and later amended their complaint for actual damages when they sold their house to another buyer for less than the original offer.

At the same time they filed their claim for actual damages, the sellers in Galatowitsch also directed their broker to release the earnest money to the buyers. The court of appeals held that the sellers had not lost the opportunity to seek actual damages after they initially opted for liquidated damages so long as the seller does not receive the earnest money.

In this case, the Osborns argued that Galatowitsch did not equate failure to authorize return of the earnest money with an election of remedies. Rather, it is the actual receipt and retention of the earnest money that could constitute such a choice, the Osborns contended.

Further, the Osborns said that the WB-11 form does not expressly direct the seller to authorize return of the earnest money before filing suit for actual damages. All the form requires is that the seller agree to the earnest money’s release before the seller can recover actual damages.

But the court agreed with Dennison who responded that the plain language of the form, consistent with Galatowitsch, does establish authorized return of the earnest money as a precondition for filing suit for actual damages.

“If we were to accept the Osborns’ theory that a seller may hold the earnest money until some point after the seller files suit for actual damages, we would cause uncertainty as to how long this advantage could continue, we would create imbalance between the parties, and we would undermine the purpose of the default provision [of the WB-11 form],” the court wrote.

The court added that “the buyer cannot, merely by demanding the return of the earnest money, force the seller into making a decision on whether to pursue a claim for actual damages or take the earnest money as liquidated damages.” Rather, “[w]hat matters is whether the seller directs the earnest money to be returned before or at the same time he files a lawsuit seeking actual damages,” the court said.